The thoughts expressed in Guest Opinion are those of
the writers and do not necessarily reflect the views of
Standard & Poor's.

Commenting on the article, "Russian Banks:
Desperately Seeking Solvency", are two prominent Russian
politicians, Grigory Yavlinsky and Boris Nemtsov, who
present their views on the current status of the Russian
economy and prospects for the future.

There could be little objection to the
overall picture portrayed by the Standard & Poor's analysts
in their recent article on the Russian banking system.
Indeed, the problems inherent in the Russian banking system
have been explained accurately and concisely, including
the origin and background of the present banking crisis
in Russia. Still, there are some points that should be
emphasized and stated more clearly to prevent misunderstanding
of the nature of the banking collapse and implications
for possible future scenarios.

It is certainly true that the government's
inability to cope with the fiscal crisis has been the
primary reason for the all-embracing banking crisis that
followed the notorious decisions made last August. Indeed,
the ruble default and the near-complete freeze of short-term
government securities could have destroyed a far more
viable banking system, especially with so little assistance
rendered to it by banking and fiscal authorities.

There are also reasons to believe that
the fault has not been wholly with the government. More
likely than not, the banking crisis would have been there
irrespective of the state of government finances. In fact,
the largely irresponsible fiscal policies of the government
that preceded and actually caused the August crash benefited
the banking system in general and the larger "systemic"
banks, major commercial private banks that form the base
of the bank system of the country, before anyone else.
Paradoxically, a more responsible and prudent management
of public funds could have worsened rather than alleviated
many of the problems that had been faced by systemic banks.
While claiming the government to be responsible for the
present insolvency of systemic banks, their owners are
well aware of the fact that the profits they extracted
from trading in government bonds far outweighed their
present losses.

Part of the reason for the weakness and
fragility of the Russian banking system, apart from Russia's
political instability, lies with managerial problems.
The latter part of my article lists several basic flaws
of the system that were evident not only to the banking
authorities, but even to the general public. For instance,
such flaws as excessive reliance on government resources
or, at best, a rather limited number of corporate clients
as a resource base, generally scarce but highly volatile
private deposits, excessive concentration of assets in
certain domains related to owners' interests, etc., were
widely known, and the risks associat-ed with them rather
widely accepted.

What was more important is that these
flaws resulted not so much from poor knowledge or skill,
or lack of experience, but rather from the specific role
that the banks played in the recently established Russian
edition of liberal capitalism. The Russian banking system
in its pre-crisis form was no more (and no less) than
a subordinate part of greater structures serving particular
business and sometimes political interests. To put it
plainly, the individuals who ultimately owned those banks
did not regard them as self-sufficient businesses, but
rather as a subordinate means to build their rapidly growing
holding empires. The banks themselves were of a species
specially bred to serve very specific needs, such as diverting
cash flows from newly acquired enterprises (especially
exporters) to chan-nels easy to control and manipulate;
and transferring capital from the country back into it,
providing their owners with ample cash to privatize new
coveted pieces of government property, etc. These specific
functions were performed as efficiently as was only possible
under the circumstances, but meeting the internationally
recognized standards of commercial banking was not among
their priorities. Their growing insolvency since the beginning
of the last year was a mere reflection of the environment
in Russia rather degradation of the system itself.

Consequently, talk of a complete collapse
of the banking system should also be treated with caution.
It is rather a collapse of a certain type of business
than of the organizations that have been engaged in that
business. The individuals and organizations that stood
behind them are still here (perhaps with some notable
exceptions) and find no problem in providing the controlled
businesses with new institutions to perform the minimally
required banking services for them. Indeed, while most
of the large banks are bankrupt according to Western standard
of accounting, there is surprisingly little panic and
even less anxiety over the issue on the part of industrial
businesses that have affiliated or connected to them.

It is correct to state that the nowadays
Russia does not possess a workable modern commercial banking
system. But we must bear in mind that it never did possess
one, crisis or not. Talk of achievements made since the
start of liberal reforms comes from emphasizing form over
essence, and market infrastructure over working market
forces. And, if we look at the essence of things, we see
a system designed not to supply finance to industries,
but rather to turn public money into offshore assets.

It is exactly this understanding that
also be the basis for evaluating the efforts of the government
and Central Bank to reconstruct and revitalize the banking
sector. In fact the system should be rebuilt on new foundations
with the principles of banking deeply revised and established
anew, unless the government wants to have crises of such
scale every two or three years. Radical change in ownership
and new principles of supervision are essential to ensure
that Russia comes out of this crisis with new banks able
to trade in financial resources and not in power relations.

In this respect, the situation is not
too encouraging. The Central Bank's program for restructuring
the banking sector is heavy on general principles but
too light on means, mechanism and resources. Too little
has been said on details. How will the lists of needy
banks be compiled? Who will get the Central Bank's stabilization
loans? Who will determine the appropriate amounts and
how? What will be the terms and conditions attached? The
talk of "socially important" banks is nice, but usually
it doesn't go as far as determining what precisely is
to be saved. The banks' names? Their businesses and networks?
The clients' money? With criteria vague and independent
outside control absent, chances are low that in the end
we'll have a system much different from the one that went
bankrupt in last year's financial crisis.

"It is correct to state that the nowadays
Russia does not possess a workable modern commercial banking
system.'' - Grigory Yavlinsky

Reforms Are Only Skin Deep

Boris Nemtsov
Leader of the Rossiya Molodaya movement
Former First Deputy Prime Minister of the Russian Federation

As painful as it is to admit, Standard
& Poor's analysis of the Russian situation is objective
and realistic.

The situation in Russia is extremely uncertain
and the prospects are vague. On the one hand, there is
an almost guaranteed default on external debt, including
Eurobonds, enormous delays in salary payments (around
75 billion rubles), continued decline in production, and
sharp decreases in investment activity.

On the other hand, we have the absence
of any positive and clear actions on the part of the government
along with dubious-at best-decisions, such as: the renewal
of offsets (writing off mutual debts between enterprises,
with no money being involved in the transaction), the
reduction in the value-added tax to 15% (perhaps the only
tax we've learned to collect), and the support of certain
banks without any transparent criteria (we can only guess
under what circumstances decisions on supporting banks
are made).

As a result, there is rather high inflation
and very low tax collection (in January less than $1 billion).
For instance, the government has a "separate" agreement
with Gazprom that allows Gazprom to pay only $100 million
a month instead of the at least $400 mil-lion a month
it should be paying in accordance with the tax laws.

There is an obvious crisis of power. The
authorities are weak and there is no trust in them. This
leads to corruption and the overwhelming unwillingness
to pay taxes. This also leads to the flight of capital,
which apparently is increasing since the trade balance
is positive and investment activity continues to fall.

What are the prospects?

The reason for these problems is that
liberal reforms, despite the presence of reformers in
government at a certain point, did not take place. Therefore,
real reforms still are required, including the following
points:

- Anti-corruption actions. A rejection
of the practice of offsets, the abolition of privileges
when it comes to paying taxes (Gazprom is an example),
the establishment of public rules, transparency, for giving
support to problem banks;

- An acceleration of bankruptcy proceedings
for enterprises not paying taxes or wages;

- A simplification of the tax system;

- A strengthening of the judicial system;

- Legal protection of property rights.

I am convinced that one of the key problems
in the country is weak management, both on the state level
and on the business level. The realization of a massive
program of management training will accelerate positive
changes in Russia.

In the upcoming Duma elections to be held
this December, the democratic candidates (Pravoe Delo
coalition, Yabloko Party) have a good chance, first of
all because they are in opposition to the regime, and
secondly, because at last they are more or less united.
Their chances will increase if an agreement can be reached
between Yabloko and Pravoe Delo on at least the elections
in single-mandate districts.

On the whole, democratic forces can be
count on 20-25 seats, which is not bad. If we add the
deputies elected from Otechestvo (Luzhkov's party) and
Lebed's party, that could be a controlling packet of votes
on key issues in the state Duma.

None of them, except Yavlinsky, is capable
of carrying out substantive economic policy. However,
Yavlinsky is unlikely to make it to the second round of
voting. This means that Russia cannot expect good news
in the year 2000, and all hopes must go to the elections
of 2004, when the voters will be people who have never
lived under the Soviet system and do not want to go back
to it.

Editor's note: Grigory Alekseevich
Yavlinsky, 47, is the co-founder and chairman of both
the Yabloko Party and its Duma faction in the Russian
Parliament. A prominent economist, he also serves as the
chairman of the Board of the Center for Economic and Political
Research (EPIcenter), a private, non-governmental research
institution based in Moscow. In 1996, Yavlinsky ran for
President of Russia on a platform of liberal opposition
to the Yeltsin government. He placed fourth with more
than 5.5 million votes. Yavlinsky has declared his intention
to run for presidency in the year 2000.

Boris Yefimovich Nemtsov, 39, was first
deputy prime minister of the Russian Federation in Prime
Minister Sergei Kiriyenko's Cabinet from March 1997 until
August 1998 and previously served as governor of the Nizhny
Novgorod region for six years. Nemtsov has joined a newly
created coalition of liberals and democrats running in
parliamentary elections. He says the group, Pravoe Delo
(Just Cause), will wait for the results of the December
vote before deciding whether to field a presidential candidate.